Dell (DELL)

CIO Today reported that Dell’s fourth quarter was “disheartening,” due to a profit margin that was below expectations, which resulted in a 5% decline in net income despite an 11% increase in revenues. Dell’s earnings release attributed the margin issue to higher growth in its lower-margin consumer division (11%) than in its business division (9%).
Dell’s problem—having to trade off between growth and profitability—is due to the loss of its competitive advantage. The company’s spectacular growth and stock price appreciation of the 1990’s (the stock peaked in 2000) reflected the fact that Michael Dell had devised a fantastic new model for making desktop computers—building them to order. By minimizing parts and finished goods inventories as well as accounts receivable (because most customers ordered and paid for Dell’s PC’s over the Web in advance), the company was able to be both the lowest cost supplier of a commodity product (desktop PC’s), as well as be very profitable. But since then, laptops PC’s have grown faster than and taken share from desktops. This trend is expected to continue. Trefis.com estimates “that desktop sales declined from a peak of 153 million units globally in 2008 to 137 million in 2009. We believe that desktop unit sales will dip further in 2010 and slowly recover to 2009 levels” in 2016. In contrast, Trefis projects that “global notebook and netbook shipments to continue to grow from an estimated 157 million shipments in 2010 to about 230 million shipments by the end of” 2016. Unlike desktop PC’s, laptops are complex to manufacture and cannot be “built to order.” This requires Dell to have parts inventory, finished goods inventory, inventory in the distribution channel, and store inventory. As the company is seeking to expand its retail presence, the latter inventory will have to grow.

Feb 23 · 12:59:00 PM · Source: CIO Today
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by Stuart Skalka